Wednesday, April 23, 2014

Thursday, October 20, 2011The California Court of Appeal (Second District) recently held thatcompeting liens of two lenders secured by the same property have equalpriority, where the respective deeds of trust were recorded simultaneouslybut were indexed at different times.

A borrower obtained loans from two different banks and secured both loanswith the same property. The executed deeds of trust were delivered to thecounty recorder's office on the same date before business hours, weretime-stamped with the exact same date and time, but were indexed (that is,placed into the public records) at different times on the same day.Specifically, the defendant bank's deed of trust was indexed a few hoursbefore the plaintiff's.

The plaintiff bank subsequently brought a declaratory relief actionseeking a determination as to the priority of the banks' respective liens.Both parties moved for summary judgment. The plaintiff bank argued thatthe trust deeds had equal priority, because they were recordedconcurrently. The defendant bank argued that its lien should havepriority because its trust deed had been indexed first. The trial courtgranted summary judgment in favor of the plaintiff bank. The defendantbank appealed, and the Court of Appeal affirmed.

The appellate court first reviewed California law governing priorities.The Court noted that California generally follows the "first in time,first in right" system of lien priorities whereby a conveyance recordedfirst takes priority over instruments recorded later. Under this system,an instrument is deemed recorded when it is "deposited in the Recorder'soffice." See Cal. Civ. Code § 1170 ("instrument is deemed recorded when,being duly acknowledged . . . it is deposited in the Recorder's office . .. for record") ("Section 1170").

The Court further noted that California's recording statutes establish a"race-notice" system of recording that gives priority for a subsequentpurchaser who, among other things, acquires a real property interestwithout actual or constructive notice of a previously-created interest inthe property and who records that property interest before thepreviously-created interest is recorded. See Cal. Civ. Code § 1214("conveyance of real property . . . is void as against any subsequentpurchaser . . . whose conveyance is first duly recorded)".

The appellate court then examined the elements of "constructive notice"for purposes of establishing one's status as a subsequent purchaser. Thecourt noted that in order to give constructive notice, an instrument mustbe "recorded as prescribed by law," meaning indexed, so that it can belocated in the public records. See Cal. Civ. Code § 1213 (subsequentpurchaser has constructive notice of conveyances "recorded as prescribedby law from the time [the instrument] is filed with the recorder). Citingprevious appellate court opinions, the court stated that an instrument"not indexed as required by statute . . . does not impart constructivenotice because it has not been recorded 'as prescribed by law.'" Thus,the Court of Appeal reasoned that the mere recording of an instrument doesnot impart constructive notice because constructive notice hinges on theindexing of the instrument in the public records.

However, the Court rejected the defendant bank's argument that its lienhad priority because its deed of trust was indexed first, and therebyimparted constructive notice for purposes of the race-notice statute. Theappellate court noted that California statutes treat recording andindexing as two distinct functions and that recording is treated as atime-sensitive task whereas indexing is not. The Court concluded thatneither bank could have had constructive notice of the other's lienbecause neither trust deed had been indexed even though they had beenrecorded simultaneously.

The appellate court also rejected the defendant bank's argument that theplaintiff bank had failed to show when its trust deed had actually beendeposited for recording. Relying on evidence as to the proceduresfollowed by the recorder's office, the court concluded that pursuant toSection 1170 the trust deeds were "deemed" recorded simultaneously whenthe recorder's office opened for business, and that accordingly neitherbank was entitled to priority under the race-notice statute.

Thus, although both banks were bona fide purchasers who took withoutnotice, neither bank was a "subsequent purchaser," as neither bank had a"previously-created" interest that was "first duly recorded." Stressingthe importance of indexing for imparting constructive notice, the Courtstated, "while title insurance companies are permitted to deposit trustdeeds with the recorder before commencement of business hours to becertain of the 8:00 a.m. recording time, those insurers also take the riskthey will not have notice of other instruments deposited at the same timeand not yet indexed."

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